Cost Concept in Accounting

The cost concept is a fundamental principle in accounting that states that assets should be recorded at their historical cost, rather than their fair market value or replacement cost. This concept is also known as the historical cost principle.

Historical Cost

Historical cost is the actual cost of acquiring an asset. It includes the purchase price, delivery costs, and any other costs associated with the acquisition of the asset. The historical cost of an asset is recorded on the balance sheet and is used to calculate depreciation, which is the gradual decrease in the value of an asset over time.

Importance of Historical Cost Concept

The historical cost concept is important because it provides a reliable and objective measure of an asset's value. It is also easy to verify because it is based on actual transactions. In contrast, fair market value and replacement cost are subjective and can vary depending on the market conditions.

For example, if a company purchased a building for $1 million, the historical cost of the building would be recorded as $1 million on the balance sheet. If the fair market value of the building increased to $1.5 million, the company would not adjust the value of the building on the balance sheet. Instead, the company would record a gain on the income statement if it sold the building for $1.5 million.

Conclusion

In conclusion, the cost concept in accounting recognizes historical cost as the basis for valuing assets. This concept provides a reliable and objective measure of an asset's value and is easy to verify. While fair market value and replacement cost are also important measures of an asset's value, they are subjective and can vary depending on the market conditions.